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Reducing inequality: education to the rescue?

When social scientists first began noticing and studying the rise in earnings and income inequality in the United States, much of the focus was on technological change. The idea is that in the past generation technology — especially computerization — has advanced more rapidly than skills, so employers have bid up pay for those able to use and improve new technology and reduced pay for (or gotten rid of) employees less adept at doing so.

Though this remains perhaps the single most popular explanation, many are skeptical. In their book The Race between Education and Technology, Claudia Goldin and Lawrence Katz offer an especially compelling critique. They suggest that the pace of skill-biased technological advance actually hasn’t changed much over the past century. What distinguishes recent decades, they contend, is that growth of educational attainment has slowed. Here’s their key picture (the vertical axis shows the share with a college degree):

Among Americans born between 1875 and 1950, the share getting a college degree rose more or less continuously. According to Goldin and Katz, as they became a sizeable portion of the labor force (assume a lag of about 30 years), inequality held steady or declined despite technological progress. But among those born between 1950 and 1965, who became an important part of the labor force beginning around 1980, college completion was pretty much flat, falling for males and increasing just slightly for females. This, say Goldin and Katz, is the key to the rise in earnings inequality that began at that time.

I think there’s something to this story, but I’m not sure it takes us very far in understanding the rise in U.S. earnings inequality or that it points us toward a solution.

For one thing, comparative evidence doesn’t seem especially supportive of the Goldin-Katz hypothesis. The following chart shows changes in earnings inequality from 1979 to 2004 (the most recent year of available data) by changes in average years of schooling completed over the same period. There is a negative association, as Goldin and Katz would predict, but it’s mainly a function of the United States; if we remove the U.S. the relationship largely disappears.

Second, the Goldin-Katz story says pay for college graduates has jumped because their supply stopped growing around 1980. But the key features of the rise in U.S. income inequality are soaring incomes among the top 1% of households (especially the top 0.1%) and slow income growth in the bottom half of the distribution. A slowdown in the supply of college graduates is unlikely to be the key to either of these two developments. It might seem implicated in the latter until we recall that college graduates have never accounted for more than a third of working-age Americans.

Finally, the above chart from Goldin and Katz indicates that college completion began rising again for cohorts born in 1980 and after. Does this mean earnings inequality will soon level off or perhaps even decrease? Absent other changes, I wouldn’t count on it.

Education is important for individuals and for society, and I certainly favor efforts to improve both its quality and its quantity. But it doesn’t seem to me likely to get us very far in reversing the rise in American income inequality.

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5 thoughts on “Reducing inequality: education to the rescue?”

I think that education is very important and the way these graphs depict education is downplaying its role. Education plays a very significant role in creating a better high-skilled labor force that can compete with immigrants that fill this demand, i.e. doctors.

I would also like to see a graph of entrepreneurship and education.

Now, i do agree that it does not play such a significant factor in income inequality in a direct way…but it is indirectly important to create a healthier, growing middle class. Better education provides people with the ability to think more for themselves and to have a better aim to better their lives and that of their family.

Side note: I think that part of the income inequality is due to NAFTA, the outsourcing of jobs and the influx of low skill labor into the US. The supply of workers is easily meeting the demand and there is no need for companies to raise wages. Part of the reason that jobs paid will during WW II was that there was a significant demand for wage workers and this, in turn, raised wages.

“Education is important for individuals and for society, and I certainly favor efforts to improve both its quality and its quantity. But it doesn’t seem to me likely to get us very far in reversing the rise in American income inequality.”

It depends how much education. Certainly if 100% of children of parents in poverty or in low income families earned college degrees, then poverty in the next generation would absolutely plummet (and the country would be vastly wealthier and safer, and science, technology, and medicine would advance far faster.)

“But among those born between 1950 and 1965, who became an important part of the labor force beginning around 1980, college completion was pretty much flat, falling for males and increasing just slightly for females. This, say Goldin and Katz, is the key to the rise in earnings inequality that began at that time.

I think there’s something to this story, but I’m not sure it takes us very far in understanding the rise in U.S. earnings inequality or that it points us toward a solution.”

I’m very sure it points to a solution to a very large extent. How about this for starters — raising taxes on the wealthy enough to pay for universal preschool starting at age 3, and 100% government paid for bachelors degree tuition and reasonable room and board for a typical 4-year state university for everyone. This is NOT a cost. It’s a high return investment of the kind the pure free market will grossly underprovide due to well established in economics free market problems like externalities, asymmetric information, etc., etc.

A great thing about this solution is that when someone gets a college degree they increase their earnings by increasing the wealth they create — usually by substantially more than their increase in earnings — rather than by redistributing wealth.

To add complication to the university degree statistic/data, it would be interesting to see the contribution of graduates of sciences, maths and professional programs (law, medical, business, engineering) versus the arts and social sciences.

It seems those with competitive skills have had their incomes continue to rise in recent decades as though they were in a boat with a rising tide, while those without had concrete boots and could only let the water rise around them. The “rise of the rest” affects low-skilled workers far more than skilled workers.